4 ways to pay off your mortgage early and calculate the savings

How to pay off a mortgage early

If you can afford it, it might be simple to pay off your mortgage earlier. But should you? That's a complicated question.

For many people, their mortgage carries an interest rate that's lower than they could average in retirement or investment accounts. And that means the "extra" money you could throw at a mortgage might actually earn you a lot more elsewhere.

With a low mortgage interest rate, homeowners are "so much better off putting that money in a Roth IRA," says Jill Gianola, CFP professional and author of "The Young Couple's Guide to Growing Rich Together."

Other financial pros agree. And if you have extra money and an employer that offers matching retirement contributions, that option might give you a higher return for your money than paying off a low-rate mortgage, says Eric Tyson, author of "Personal Finance for Dummies."

Then there's the college aid factor. If you're applying for need-based aid for your kids, that home equity could count against you with some colleges, he says, because some institutions view equity as money in the bank.

If, after those caveats, you want to pay off your mortgage early, here are 4 ways to make it happen.

Just pay more

Divide your monthly principal and interest by 12 and add that amount to your monthly payment. End result: 13 payments a year.

Let's say you got a $200,000 mortgage at 4.5%. After 5 years of making the minimum payments, you add an extra 1/12th of a month's principal and interest to each monthly payment. Doing so pays off the mortgage 3 years and 3 months earlier, and saves more than $18,000 interest.

Minimum payments only

Monthly principal and interest, years 1-5

$1,013.37

Monthly principal and interest, after year 5

$1,013.37

Years and months to pay off loan

30 years

Total interest

$164,813.42

Add 1/12th to payment

Monthly principal and interest, years 1-5

$1,013.37

Monthly principal and interest, after year 5

$1,097.82

Years and months to pay off loan

26 years, 9 months

Total interest

$146,737.89

Your savings

$18,075.53

Before you make anything beyond the regular payment, phone your mortgage servicer and find out exactly what you need to do so that your extra payments will be correctly applied to your loan, says Joel Doelger, director of community relations and housing counseling for Credit Counseling of Arkansas.

Refinance with a shorter-term mortgage

Want to make sure your mortgage is paid in 15 years? Refinance to a 15-year mortgage.

Let's say you got a 30-year, fixed-rate mortgage for $200,000 at 4.5%. Then, 5 years later, you can refinance into a 15-year loan at 4%. Doing so pays off the mortgage 10 years earlier and saves more than $60,000 (if you exclude closing costs on the refi).

Minimum payments only

Monthly principal and interest, years 1-5

$1,013.37

Monthly principal and interest, after year 5

$1,013.37

Years and months to pay off loan

30 years

Interest rate

4.5%

Total interest

$164,813.42

Refinance to 15-year fixed

Monthly principal and interest, years 1-5

$1,013.37

Monthly principal and interest, after year 5

$1,345.45

Years and months to pay off loan

20 years

Interest rate

4%

Total interest

$103,539.27

Your savings

$61,274.15

Those shorter-term mortgages often carry interest rates a quarter of a percentage point to three-quarters of a percentage point lower than their 30-year counterparts, Tyson says.

But this option is not quick or free. You must qualify for a new mortgage -- which means paperwork, a credit check, and, likely, a home appraisal. Plus closing costs.

And even with a lower interest rate, that quicker payoff means higher monthly payments. And this method is a lot less flexible. If you decide that you don't have the extra money one month to put toward the mortgage, you're locked in anyway.

Unless the new interest rate is lower than the old rate, there's no point in refinancing, says Doelger.

Without a lower rate, you'll get all the same benefits (and none of the extra costs) by just increasing your payment a sufficient amount, he says.

Make an extra mortgage payment every year

Make 13 payments in 12 months. There are a couple of ways to pull off this tactic. You can save up throughout the year and make an extra payment. Or, for those who get paid biweekly, harness part or all of those "extra" or "third" checks.

The equivalent of 13 payments a year will slice years from a new 30-year mortgage, Tyson says.

Let's say you got a 30-year mortgage for $200,000 at 4.5%, and you decided to add an extra 1/12th of a month's principal and interest to each monthly payment, starting the first month. Doing so pays off the mortgage 4 years and 4 months earlier, and saves more than $27,000 interest.

Minimum payments only

Monthly principal and interest, years 1-5

$1,013.37

Years and months to pay off loan

30 years

Interest rate

4.5%

Total interest

$164,813.42

Paying extra

Paying 1/12th extra principal and interest each month from the beginning

Throw 'found' money at the mortgage

Get a bonus? A tax refund? An unexpected windfall? However it ends up in your hands, you can funnel some or all of your newfound money toward your mortgage.

Let's say you got a 30-year, fixed-rate mortgage for $200,000 at 4.5%. Then, 5 years later, you can make an extra $10,000 lump-sum payment. Doing so pays off the mortgage 2 years and 4 months earlier, and saves more than $19,000 interest.

Minimum payments only

Monthly principal and interest, years 1-5

$1,013.37

Years and months to pay off loan

30 years

Interest rate

4.5%

Total interest

$164,813.42

Making a lump-sum payment

$10,000 lump-sum payment at 61st month

$1,013.37

Years and months to pay off loan

27 years, 8 months

Total interest

$145,751.10

Your savings

$19,062.32

The upside: You're paying extra only when you're flush. And those additional payments toward the principal will cut the total interest on your loan.

The downside: It's irregular, so it's hard to predict the mortgage payoff date. If you throw too much at the mortgage, you won't have money for other needs.

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